In the heyday of Indian socialism, the perception of government was benign. In today’s climate of liberalisation, the government is viewed with hostility. That must explain the negative reaction both in the media and amongst the public at large to the increases in pay for Central government employees recommended by the Seventh Pay Commission (SPC).
The pay hikes are modest — embarrassingly so in comparison with pay increases and bonuses in the private sector. Yet, media reports talk of a ‘bonanza for babus’. The impact on the fiscal can be easily digested by the Indian economy. Yet, analysts warn of slippages in the fiscal deficit, a possible boost to inflation, and a setback to public investment. Do we want to run the government — which comprises not just civil servants but the police, armed forces, nurses, doctors, regulators and academics — at all? Or have we persuaded ourselves that all of the government is simply money down the drain?
Setting pay in government
The SPC’s figures don’t come out of nowhere. The Commission has a rigorous basis for setting pay in government. It arrives at a figure for minimum pay in government with reference to norms laid down by the 15th Indian Labour Conference (ILC) in 1957. The ILC had said that the minimum wage should cover the basic needs of a worker and his family, that is, a spouse, and two children who are below the age of 14. The SPC has spelt out the norms it has used for determining basic needs. It has gone by food requirements specified by a well-known nutritionist. To this are added provisions for clothing, fuel and lighting, education, recreation, festivities, medical expenses, and housing. There is an addition of 25 per cent to the total of the above to provide for the skill factor (the basic needs having been determined for an unskilled person). The SPC report provides detailed computations for each of these items. No reasonable person can accuse the SPC of being overgenerous.
Based on these norms, the SPC arrives at a minimum wage of Rs. 18,000 for a government employee. This is 2.57 times the minimum pay in the Sixth Pay Commission. The increase over the projected pay on the current basis as of January 1, 2016 is 14.3 per cent. This is the second lowest increase recommended by any Pay Commission since the first one, and it is way below the 54 per cent increase following the last one. The multiplication factor of 2.57 is used to arrive at pay for all levels of government except for a few at the top where a slightly higher multiple is used.
As before, pay at the lower levels of government is higher than in the private sector; at the top, the position is reversed. In today’s context, this may not be a bad thing at all. Pay in the private sector today is contributing towards massive inequalities in Indian society. Having a very different structure in government is a useful corrective to trends in the private sector. It will help contain tensions created by rising inequality.
So far as the impact on government finances is concerned, the SPC numbers provide a stream of good news. First, the impact of the pay hike on the Central government (including the railways) will amount to 0.65 per cent of GDP. This is less than the impact of 0.77 per cent of GDP on account of the Sixth Pay Commission.
Second, the impact on the Central government (excluding Railways), which is what matters when it comes to the Union budget, is 0.46 per cent of GDP. As some of the increase in salary comes back to the government as taxes, the impact, net of taxes, will be even less — say, 0.4 per cent of GDP (assuming an average tax rate of around 20 per cent on government pay). This is a strictly one-off impact. The correct way to view it, therefore, would be to amortise it over a period of, say, five years. The annual impact then is 0.08 per cent of GDP. The impact on the fiscal at the central level is barely noticeable.
Trends in the wage burden in the government are worth noting. Pay and allowances in the Central government have remained stable since 2010-11 at around 1.8-2.0 per cent of GDP. Thus, pay and allowances have been rising at roughly the same level as nominal GDP or 11-12 per cent. This is the increase after taking into account increments, adjustments for dearness allowance and promotions. In the private sector, such an increase would be considered laughable at all but the lowest level.
Pay, allowances and pension (PAP) as a proportion of government expenditure has been declining sharply. In 1998-99, PAP was 38 per cent of revenue expenditure. The SPC estimates that this figure has fallen to 18 per cent in 2015-16. (It will go up to 22 per cent in 2017-17 consequent to the SPC award, but will decline thereafter, as pay grows at a lower rate than government expenditure). The implication is striking: in financial terms, the workforce in government has been effectively downsized by nearly half over the past 17 years.
Pay in the private sector is contributing towards massive inequalities in society. Having a different structure in government will help contain tensions created by this inequality
Even in terms of numbers, India’s central bureaucracy (including the Railways but excluding the armed forces) has neither been increasing in recent years nor hugely bloated in absolute terms. The number of employees grew to a peak of 41.76 lakh in 1994. It has declined since to 38.9 lakh in 2014. Of the total, 13.8 lakh is accounted for by security-related entities (police and defence civilians). Railways and Post, which perform commercial functions, account for 15 lakh personnel. There are other commercial departments as well, such as Communications. Excluding security and commercial functions, the total central employment is just 4.18 lakh. “The ‘core’ of the government…”, the SPC report notes, “is actually very small…”
The SPC substantiates its point by comparing India’s Central government workforce with that of the federal government workforce in the U.S. In 2012, the non-postal civilian workforce in the U.S. was 21.3 lakh. In India, the corresponding figure in 2014 was 17.96 lakh. The number of personnel per lakh of population in India was 139 in 2014, way below the figure of 668 for the U.S. India’s bureaucracy needs not so much downsizing as right-sizing — we need more doctors, engineers, IT specialists, tax experts, judges, and so on.
The government is not bound by the SPC’s recommendations. It can opt for higher pay hikes as happened with the previous Pay Commission. Assuming the government goes along with the SPC, what impact on growth can we expect? Increased pay for government employees means greater government expenditure and hence a fiscal stimulus — provided government expenditure on other counts is not reduced and the fiscal deficit rises. This happened at the time of the Sixth Pay Commission. Higher wages for government employees contributed to a higher fiscal deficit and helped stimulate growth in the short run.
This time round, the Finance Ministry insists that it will stick to its fiscal deficit target for 2016-17 after providing for the SPC pay hike. If it does so, the reduction in fiscal deficit will be contractionary. Hence, the pay hike will not lead to economic expansion in the aggregate. However, greater income in the hands of government employees could favourably impact sectors such as the real estate, automobiles and consumer goods.
While the 7th Pay Commission report recommendations have been a source of joy for hundreds of thousands of government employees, for the national trade unions linked to the Bharatiya Janata Party (BJP) and the Left, the hike has not been high enough and they have not kept quiet about it.
Trade unions have protested vehemently against the 7th Pay Commission and are looking for redressal of their grievances and contemplating action. They have also looked at strong industrial action to indicate their unhappiness and will be indicating soon what their future course of action can be. Here are the top 10 reasons why, they say, they are angry with the Seventh Pay panel report:
1. Proposed 7th Pay Commission hike is lowest in many decades and not in sync with inflation - least hike (proposed) in the last 30 years. Considering the inflation, it is unsatisfactory.
2. 7th Pay Commission has recommended a 16 per cent hike in net pay against projected 23.55 per cent.
3. There is a huge gap in maximum and minimum pay in the 7th Pay Commission report recommendations.
4. The gratuity ceiling recommended by 7th Pay Commission has been raised from Rs 10 lakh to Rs 20 lakh, the benefit of this will go to senior officials only.
5. 7th Pay Commission report has ignored sharp increase in prices justifying substantial upward revision in HRA and other allowances. Instead the commission has reduced rates of HRA from 30 per cent to 24 per cent of the basic pay in A Class cities and corresponding decrease in other cities which is a retrograde recommendation.
6. Doubts about the way the 7th Pay Commission has calculated the figures. For example, they calculated House Rent Allowance (HRA) at 3 per cent against the mandated 7 per cent.
7. As per commodity prices on Agriculture Ministry's website and on the basis of Labour Bureau data, the Basic Pay comes at Rs 11,341 while 7th Pay Commission calculation shows it at Rs 9,218. There is a lot of gap.
8. There is no clarity in the 7th Pay Commission report on the pay revision for lakhs of contract workers in government ministries as well as 3 lakh Grameen Dak Sewaks.
9. 7th Pay Commission is the only commission, which has reduced the allowances and due to which the growth in net income is only 14.28 per cent. (PTI).
10. 7th Pay Commission report is totally disappointing and beats logic. Employees and workers will meet on November 27 to protest against the recommendations of the 7th Pay Commission and discuss the issue.
NOTE: The 900-page report of the 7th Pay Commission headed by Justice A K Mathur was presented to Finance Minister Arun Jaitley with a recommendation that the new scales be implemented from January 1, 2016. The panel recommended a 14.27 per cent increase in basic pay, the lowest in 70 years. The previous 6th Pay Commission had recommended a 20 per cent hike, which the government doubled while implementing it in 2008.
Sub: Meetings with the VII CPC and the Cabinet Secretary
Today I met the Chairman, VII CPC, Justice Shri Ashok Kumar Mathur, and expressed our anguish against retrograde recommendations of VII CPC, particularly reg. Minimum Wage, reduction in HRA and CCL, non-redressal of NPS, abolition of various allowances, examination of MACP benefit, etc. etc.
Tough he had given argument, but I told him about the anguish of all the constituents of the JCM(Staff Side), who feel that they have been betrayed by the VII CPC.
Comrades! I have also met the Cabinet Secretary, Shri P.K. Sinha, in the afternoon and handed him over a copy of the attached letter and requested him to convene meeting of the NC/JCM at an earliest as well as to intervene in the matters raised by the JCA in case of report of VII CPC at an earliest. The Cabinet Secretary has promised that he would try to fix the meeting at an earliest and also look into the points raised by the NC/JCM(Staff Side) for VII CPC.